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tv   Book TV  CSPAN  December 25, 2012 2:00pm-3:15pm EST

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visit booktv's web site, visit or our facebook page, >> now on booktv and one of the wall street journal talks about the 1938 creation and 70 year history of the mortgage giant fannie mae. it is about 1 hour and 15 minutes. >> thank you very much for being here and good afternoon. welcome to our book forum, "the
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fateful history of fannie mae," faithful not only for fannie mae but for everybody else too and there are copies of the book out in the reception area which we hope you will buy and which bob hagerty will autograph after the program. i am the president fellow at a e. i. and we are pleased to have you with us to consider this fateful history and its role in american politicized housing finance. after many years of dealing with and thinking about fannie mae i thought i knew a lot about this subject but i learned a lot more about it from reading bob's book, especially the very long-term evolution of politicized mortgage finance in this country and also about the vivid personalities involved over the last 40 years, all the way to the end of the story, at least it is the end so far.
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the book is full of information but in addition if you read my invitation to this event you know i think it represents an underlying tragic drama. in fact a shakespearean tragedy in five's. rise, power, hubris, fall, and other humiliation. on power, many people in washington not so long ago and in the mortgage business everywhere in the country were truly afraid of fannie mae and the retribution it needed out to people who dared to cross it. on hubris, fannie often claiming it was the center of, quote, of the best housing finance system in the world. so ironically in retrospect, of
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course. this sentiment being echoed by former senator, banking committee chairman dodd, exclaiming that fanny was, quote, one of the great success stories of all time. and so it was until the fall and humiliation. all five acts are very well chronicled by bob's book, but which shakespearean tragedy is this in the background behind the history of fannie mae. thinking of the fear of any, perhaps it is richard iii, with annie and ruthless richard, brought down finally on the field of buzz words by henry paulson playing henry vii or thinking of than fannie ceo dennis mud as presented in the
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book, pathetically presenting financial plans to a treasury department which have already decided on and was scheduling his fate. is it the great pathos pull abdications seen from richard ii with dan note as richard handing over the crown to henrik iv played by james lockhart? maybe. the best shakespearean analog is julius caesar. with the dictator, mortgage finance cut down in the capital, henry paulson this time playing brutus, i am thinking of the great scene where mark antony stands over and addresses the murdered body of caesar. this time we have mark antony
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played by bob hagerty standing over and addressing the fallen fannie, oh mighty fannie, do you live solo? that is enough indulging myself. your indulgence. we are about to hear from the author of this excellent book. after bob's presentation we have ten minute comments and i will introduce at that point and we will follow that with discussion, including your questions at 6:00 and adjourn for reception. and a book signing an informal discussion at that point. and in the wall street journal, and does work as reporter and bureau chief for the wall street journal, and the international herald tribune in hong kong, london, brussels, paris, atlanta, served as managing
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editor of the asian wall street journal and london bureau chief, and won the distinguished supporting award. and one of the reporters that act in 2008 excellent and urban journalism award. in 2004 to 2010, and has written very insightful and instructive book, the fateful history of fannie mae -- "the fateful history of fannie mae" which he will now discuss and we are delighted to have you here. [applause] >> thank you all for your interest in this topic. the a e i was so far trying to pack with the dangers of fannie
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and freddie. now that congress is listening. it is a pleasure to be your, someone helps me with my research, alex, tom, tom stanton, others, thank you all. i recently looked at the electronic version of my book on itunes and itunes informed me people who bought my book also bought winnie the pooh. winnie the pooh first appeared in 1926, fannie mae came along a dozen years later. both have proved surprisingly durable. one turned into a disney franchise, the other became a national disaster. despite all of their troubles, fannie and freddie still are responsible for most new home mortgages in the united states. we have nationalized a huge part
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of our mortgage industry. how did we get to this point? it wasn't on purpose. it was really more of an accident and it was a bipartisan accidents. let's go back to the 1930s. a quarter of the work force was unemployed. half of all mortgage debt was in default. housing starts were down about 90% so when roosevelt became president in 1933, the top priority was to get people back to work. sounds kind of familiar. building houses would be a great way to do that but to build houses you need to back loans and banks were not in the mood to gamble on real-estate so the government would try to make banks feel more secure. the housing act of 1934 created the federal housing administration, the fha.
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provides insurance to banks who know they get their money back but even with the f h a, banks still might feel nervous. they might want somebody to buy those mortgages from them. in that same housing act of 1934 congress made provisions for a new breed of privately-owned firms called national mortgage association's. they were to buy fha insured loans. just one problem. no private investors wanted to do it. so finally four years later, 1938, the roosevelt and ministration created the federal national mortgage association which became known as fannie mae. was a tiny federal agency. what brought that companies would not do uncle sam would. this was not considered big news at the time. the wall street journal buried the story on page 2 and it was
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only eight sentences long. i want to point out that was before i started at the journal. otherwise we would have had a bigger story and it probably would have been on page 1. washington created many government programs in the 1930s and many are still with us but when dwight eisenhower became president in 1953 he wanted to end those programs. this is roosevelt signing the act of 1934. when eisenhower was not busy playing golf he tried to do just that. he wanted to get the federal government out of the mortgage buying business. he proposed legislation to gradually transformed fannie mae from an agency into a privately-owned company. the idea was mortgage banks, the users of fannie mae gradually would buy shares in the company and the treasury would sell its
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shares. congress passed legislation, eisenhower signed it. you can see many thought was a good idea. there was one fatal flaw in his legislation. there was no deadline for fannie transform itself into a private company. so it didn't happen. in fact four years later in the midst of a housing slump congress ordered fannie mae to take on even more government-backed debt to finance more housing. it was the beginning of a pattern. whenever we had a housing crisis fannie mae was always going to be part of the solution. in essence fannie was a subsidy to housing. the home builders loved it, the realtors loved it, the rest of us were not paying attention. of course any government subsidy will create a constituency devoted to preserving that subsidy but fannie had a better organized group of allies than
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most other programs. the realtors and homebuilders across the country, a patchwork of state and local agencies and nonprofit devoted to affordable housing. they are known as how others. you get them in together and they are an unbeatable coalition. any may persisted. in the 1960'ss the federal government had a bigger problem to deal with, the war on poverty, war on vietnam, riots, protests, realtors defending their subsidy. reforming fannie mae is not a huge priority. the topic came up because of low-budget disputes. critics of president johnson complained the federal budget did not reflect all of the federal government. lbj appointed a commission to
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try to settle this debate. in 1967 that commission decided that the deaths of agencies in fannie mae should be included in the federal budget. in the case of fannie mae that would have added $2.5 billion. we couldn't really admit we were spending all that money subsidizing home mortgages so lbj's white house dust off eisenhower's idea. housing legislation in 1968 provided for the sale of fannie mae to private shareholders. that is johnson's signing the bill but fannie mae would still have a charter from the government and it would still have a role in public housing policy. it would still look and feel a lot like a government agency. no one seems to have fought much about whether there was a contradiction between having a public policy role but being
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owned by private shareholders wanting maximum profits. officially the government would not guarantee the debt. the government would officially denied that it had any responsibility for fannie may's debts but fannie mae would still be bar with lots of money in the bond market on wall street and the buyers of those bonds would assume that when it came down to it in a crisis uncle sam would have to make good on those debts. this became known as the implied guarantee. congress never enacted it but there it was. it could borrow money very cheaply which meant fannie mae could be very profitable and push aside competitors who did not have an implied guarantee. joe calaflano was one of the advisor is to lbj and i asked about this setup and he said it seemed like a good it at the time. as he put it fannie mae was a
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high of that attracted the private money bees. it got money to housing that otherwise would have gone somewhere else. it didn't have to be on the budget. that was long as a very good thing. in came the nixon administration. surely republicans would support the idea of getting the government out of the mortgage business. not so fast. the nixon people didn't want to let go. they noticed that the president of fannie mae was a democrat. he had been a big contributor to edmund brown, helping brown to defeat nixon to become governor of california in 1962. nixon still remembered that. one of the early dirty tricks of the nixon white house was finding a way to get rid of ray. nixon's housing secretary was george romney whose son has been in the news lately.
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mitt romney's dad complained ray was not being cooperative. he felt he could run fannie mae any way he saw fit. there was also talk that ray might have used fannie mae posted your letter head to raise money for democratic candidates and the white house was getting complaints from republican lawyers in south carolina that democratic lawyers were getting all the fannie mae work related to foreclosures, all the fees. in nine months of taking office nixon hired him -- fired him without giving any public explanation. lapin resisted, said that nixon was turning fannie mae and to what he called a patronage putting. lapin tried to get a restraining order from a federal judge. the judge wouldn't budge. beret kept showing up for work anyway. at one point of the lights went
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out at fannie may's offices and the phone lines went dead. some people at fannie mae interpreted this as a subtle message from the nixon white house. finally gave up and walked away. nixon appointed a new president of fannie mae, a locally under, one of knicks and --oakley hn r hnter. he served congress in 1915s, and after his adventures in the fbi and washington he settled down with his kids as a real-estate lawyer in fresno, calif.. was pretty dull. he was really itching to get back to washington, back to the action. just after nixon was elected, oakley hunter sent a letter to rose mary woods, nixon's secretary. i guess you would say my special field is housing and urban development. there are very few republicans in the field and even fewer who would care to be in a lifeboat
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with one. i like the ending list a healthy, you are photographing well. hunter was always a lady's and. loved to party. i can show you exclusively a party favor, fannie mae party in that era. hunter also bought a new headquarters for fannie mae. some people said it was the sort of palace louis xiv would have built if he had the money. during nixon's first year in office the fed was fighting inflation. interest-rate wind up and housing starts came down 40%. nixon declared a crisis situation in housing and the solution was more fannie mae. we got a hot -- home financing
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act of 1970 creating a second government chartered mortgage company freddie mac designed to cater to the s&l industry and more importantly allowed both fannie and freddie to buy a much wider variety of mortgages, not just fha loans or a tiny sliver of the market, but conventional mortgages, mainstream mortgages for the middle-class, even the upper-middle-class so fanny had a much larger role in the housing market and was spreading across the country like manifest destiny. why did this happen? there was no debate in public but the homebuilder's were for it, the american bankers association was for it, senator john sparkman of alabama was for it and so was representative wright hadn't of texas, george romney endorsed the idea, most of us were not paying attention. along came the carter administration. carter's housing arena was
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patricia roberts harris. hunter reminded her fannie mae was no longer government agency was supposed to be managing its affairs. mrs. harris friend legislation to try to restore more government control over fannie mae. under tried sending flowers to mrs. harris and even a box of fannie mae chocolate's. she sent an back. she said if she ate those chocolates she would become as fast as the profits at fannie mae. the two sides came to a compromise. the department of housing and urban development set goals for fannie's financing of mortgages for poor people if that part of the business ever fell below a certain level. oakley hunter's people figured they had snookered mrs. harris because they promised to do only
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what they would have done anyway but a precedent had been set. the government could impose quotass on fannie mae. ronald reagan's turn. it was morning in america. peter wallace and was a young whippersnapper in the treasury. surely president reagan would finish the job getting the government completely out of the mortgage business. there was even a perfect pretext. fannie mae was losing money at that time, $1 million a day because of the double-digit interest rates imposed by the fed to fight inflation so the white house might have used that crisis as a pretext to put fannie mae to sleep but it wasn't seen as the right time. the economy was wobbly, nobody wanted to upset the housing market. instead of putting any to sleep the reagan administration and congress gave it a tax break and helped it survive. by the 1980s fannie mae was
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making boat loads of money again and it was so profitable was almost embarrassing. now lessee of was a savvy fellow named david maxwell from philadelphia. maxwell knew that there was a fundamental choice to be made. a right wing would always push to abolish fannie mae because it was a form of socialism. the left wing would always be pressuring any and freddie to earn their keep by doing more for the 4. the bigger fannie and freddie got, the more political pressure they would feel. so this government charter, this rule in public policy, really worth the bother? should fannie mae cut the cord with the federal government and become a truly private company? maxwell lawyered up a study that question and the first person he hired to do the study was jimmy johnson. johnson came from the small town of bentsen, minnesota.
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i went there. didn't find much. from these humble beginnings johnson became a big operator in the democratic party. he worked for the presidential campaigns of gene mccarthy, musky, george mcgovern, walter mondale. in fact, almost everybody ever backed for the presidency ended up losing and they didn't even come close but that didn't matter because he was a smart fellow with great contacts in washington so johnson did this study about whether to give up the charter and the answer came back no way. for the shareholders the government banking was too valuable. it meant fannie mae could borrow money cheaply and make huge profits and pay huge salaries all the while supporting the idea of what nice house and white picket fence for everybody. fannie basically made a deal with the devil. it was going to keep its
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privileges and do whatever it had to do to defend those privileges in congress and as fannie became more political, who would be better at running it than jim johnson? maxwell named johnson the new ceo end-1991 maxwell retired and took home a retirement package that was more than $20 million. even charles schumer who was normally a big fan of fannie mae was taken aback. schumer, and i think maxwell did a good job but that is enough. under johnson any perfected its lobbying. went around the country financing housing project in the district of any congressman who might prove useful. the congressman loved posing for pictures in front of those projects and taking credit for bringing money into their districts. fannie mae was going to need a lot of friends because there was a political problem to be dealt
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with. in the 1980s thousands of savings and loan institutions had gone bust largely because they made a lot of crazy loans on real-estate. the deposits of those were insured by uncle sam so the government ended up with the bill for $124 billion and congress felt obliged to see what else might go wrong and lead to more bailouts. hud was still regulating fannie and freddie and admitted it didn't have the time or expertise to keep track of them. congress decided it was going to create a new improved regulator for fannie and freddie and jim johnson said that is fine just do it our way. he said the regulators should not be allowed to micromanage fannie and freddie because that might prevent them from doing their job which was to keep the housing market healthy and make
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more and more americans into homeowners. in 1992 congress obediently created a very weak regulator for fannie and freddie. one of the few dissenters was representative jim leach of iowa who noted the 1992 legislation was written by lawyers for fannie mae. after this great victory, fannie mae had a huge growth spurt under jim johnson. you can see that for the first -- in the 70s and 80s fanny was a small agency but as we got into the 90s it grew very fast. part of that was the disappearance of s&ls who were competitors. one of johnson's main allies and golfing buddies was angela mozilla, son of a butcher from the bronx who helped create the largest mortgage lender and america and he got -- he loved to talk about home ownership which he found ennobling and
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enriching. fanny with the help of lenders like countrywide began offering more loans with low down payments, 5% or less and generally loosened restrictions so more people could buy homes. to most people it seemed like a good idea. one way to get people out of poverty was to help them own their own homes so they could build up some equity. it all seemed to work out pretty well under jimmy johnson. he was able to retire in 1998 as a hero and got a pretty nice retirement deal which was not fully disclosed at the time. his pension was $852,000 per year but that wasn't all. he also remained a consultant to fannie mae in case his successors should ever tap into his wisdom. that gave him another $390,000 per year. plus two support staff members plus a car plus partial payment
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for a driver. the necks c e o was franklin delano rains named in honor of the president who had created fannie mae. he seemed to exemplify the american dream. he grew up very poor in seattle and went to harvard, he went to oxford, he became an intern in the nixon white house. he became a lawyer and investment banker and budget director under president clinton. for a while people were talking about him as possible treasury secretary. and in may, rains carried on with new policies of jimmy johnson. the clinton administration and iman. in july 1999, secretary cuomo announced fannie and freddie would increase the percentage of their mortgage financing that
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went too low or moderate income families to 50% in 2001 from 42% that was set back in 1995. these new rules would provide affordable housing for 28.1 million families over the next decade. think about it. cuomo could promise to create 20.1 million homeowners without asking congress to set down a single penny. simply told fannie and freddie to do it. and they said we would be delighted. you remember how jesus said 5,000. cuomo housed twenty-eight.1 million. rains also has ambitious goals for profits. he set a goal of doubling earnings to $6.46 per share within five years and this $6.46 number was taken seriously by his team. this is a pep talk from a senior
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vice president at fannie mae. you must be able to say it in your sleep and forwards and backwards, raging fire in your belly that burns away all doubts, you must live, breathe and dream 646. fannie did meet that earnings goal. the securities and exchange commission found that fannie mae had been a little off in its accounting. raines said that he knew nothing about any accounting shenanigans. terrains and his cfo explaining the dubious accounting in congress. was he to blame? last month u.s. district judge dismissed shareholders' lawsuit against rains. the judge found no direct evidence rain the new accounting rules have been violated. when raines was fired at the end
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of 2004 there was a huge upheaval at fannie mae. a couple thousand consultants were hired to string out the books. the total cost including fines was more than $2 billion but there was a bigger cost. executors' and regulators spend so much time worried about accounting they did not have enough time to worry about the housing market. housing prices were soaring to crazy levels even for houses like this. everyone was refinancing mortgages, lending standards became incredibly lax and everybody thought they could make a killing on real-estate. even the playmate of a month from may of 2005, jamie west and kaiser --westenheiser was going into investment tight real-estate. one financial magazine later
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commented, moving from one set of inflated assets to another. amid this dangerous period fannie appointed a new ceo, dan mud, son of roger mudd, the tv newscaster. he was an ex-marine decorated for dangerous mission in lebanon and now stepping into another minefield. he saw his job as cleaning up the accounting mess, making nice with the critics of fannie mae, meeting the hud goals for affordable housing which had been increased even further under president bush and competing with wall street in the mortgage market because by now wall street was crazy about mortgage, especially the riskier kinds because they were very profitable. wall street was taking away more and more of the business from fannie and freddie. mud and his colleagues were worried fannie might become irrelevant. what should they do? should they go out and buy the same crazy mortgages wall street was buying?
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should a step back from the market and wait for a new outbreak of sanity? mud and his colleagues knew that the risks were growing but they underestimated how much worse things could get and they were red blooded american businessmen how to win the game and take home the stock options. they debated for a while in 2005 and in this end by early 2006 they decided wall street thought it was a good idea to buy lots of high risk some prime mortgages. of wall street was raking in the dough, fannie should do so too. of course, they said we will do it in a responsible, prudent way. fannie made the same decision. they both increased their buying of mortgages at the worst possible moment, just when the housing market was starting to collapse. by late 2007 early 2008 they were losing large amounts of money. the chinese who had bought what
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of bonds were getting and see. they kept calling treasury secretary paulson say in what is up? are you behind fannie and freddie or not? because hardly tell china to jump into the south china sea because they were our biggest creditors. by mid 2008 the game was over. the treasury had to coming and provide huge infusions of money. so far this cost $142 billion. fannie and freddie were under the thumb of their regulator, edward demarco, a no-nonsense fellow who promise to shrink gradually and reduce the independence of the housing market gradually. meanwhile we are still relying on fannie and freddie to provide funding for most mortgages. annie, freddie and the f h a have accounted for 90% of u.s. home loans. eventually congress will make a fundamental decision about what kind of mortgage market we will have. it will go back to trusting the free market or have some kind of government mechanism in place to
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insure that home mortgages can always be affordable? i submit that the historical record of the past 70 years suggests when a comes to housing congress will have a hard time trusting the market. thank you. [applause] >> great comments. this brings us to our discussions of whom the first will be tom who has been in the mortgage research business for 35 years, a longstanding critic of government sponsored enterprise and has great perspective on the fateful history which bob has so well chronicled. he held with morgan guaranty insurance corporation, north american mortgage, asset capital research and wholesale access of boutique research and consultancy. tom issue early-warning the increasing risks of fannie mae about which he was correct and
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of course ignored. our second, edward pinto is chief credit officer of fannie mae so he has lived an important part of this history. as an a e i followed with groundbreaking research on the contribution of government housing policy to the mortgage crisis, two of his key research papers were submitted to the financial crisis inquiry commission. he is developing policy considerations and options including countercyclical mortgage policies and improved understanding of real-estate through appraisals rebuilding american housing finance sector. tom, you are first and we're looking forward to your comments. >> pleasure to be with all of you. my thanks to alex and edward pinto for sponsoring this forum. pleasure to see bob again after a couple of years. i have as alex addressed the longstanding critic of fannie
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and freddie. i don't come from the right side of the political spectrum. i tend to be left the. i wasn't sure if i would get through the door without an alarm going off. but managed to get up here. my first job out of graduate school was working for fdic. one of my responsibility was to monitor the activities of fannie and freddie and on a quarterly basis i made a pilgrimage to d.c. to visit the executives at fannie and freddie. my responsibility was to monitor their programs, their people, i did that for 11 years and on a weekly basis i included a portion on fannie and freddie because they were key determinants of the activity that was going on in the mortgage market. it gave me an opportunity after i started this in the 70s to
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really watch the history and follow the evolution of fannie and freddie and i didn't really become concerned about any of this until after 1992 and the reason i did was really threefold. i had noticed a dramatic cultural change at fannie mae after 1992. the attitudes of the access to people really change fairly dramatically and really raised my eyebrows and those with a lot of other people. after i left and t i c i continued to monitor their programs as part of my consultancy and the research i was doing and continued to follow all of their programs and got progressively more concerned. it was not only the more conservative elements but also there were liberals as well that
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were concerned about what was going on. i remember distinctly coming to washington in the summer of 1998 to attend a seminar that ralph nader was sponsoring. he too was very much a critic and so the criticism that was being leveled at fannie mae was coming from both sides although admittedly the conservatives were more on top of it than the democrats and liberals. the concern in addition to the cultural change that i saw was the result of changes that were going on inside fannie mae and freddie mac to a lesser extent. bob has done a marvelous job freezing this history and the evolution in the book and for me it was something like a trip down memory lane to read his
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book because i kept running into names of people like roger birk and all of the people who were involved in the agency and running it. one summer i read buchanan's book, james buchanan, the nobel laureate in economic science and got turned to the concept of public choice theory. that was another alarm bell for me because it gave me another perspective to -- in which to look at what was going on inside of washington. i thought very much that all of this would get solved because the problems were so immense that it seemed to me if i noticed this and did not come out of harvard or oxford that certainly the rest of the people in the industry would be as concerned or more concerned than
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i was about this. i knew enough about economics to understand the difference in structure, industry structure's competitive markets as compared to duopolies and monopolies and i knew when you had market structures that were in this case best statutory duopoly that it created a large dead weight loss. in the spring of 1996 i was invited by the m v a and i apologize if my voice oscillates a bit, i got out of an airplane and hour-and-a-half ago and my years have not yet popped but in any case i was invited to make a presentation as to the profitability of the mortgage banking industry and why it asked for so many consecutive years, prior years why the industry had feared so poorly from a profit perspective.
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that prompted me to do some research and i was very fortunate in that the summer of 1996 prior to this presentation i had an opportunity to read the g a o study that came out that spring as well as the hud study and the treasury report and the more i read the more alarmed i became so that by the time october rolls around i was fully prepared in order to blast the gmcs, the speech of which most of it is there. there are a few tables missing. it has been passed out to you and you see where my criticisms were. that speech was not well-received accept among the people, a lot of the people in the industry who felt absolutely, many of them thought i was right on in terms of my analysis. fannie and freddie people, however, within the first weekend minutes were up and out of their seats and out the door
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and went to warren lasko who was the nba president at the time and complained as to why they would allow someone like me to criticize them. what could i possibly know that would prove to be correct? for several years i was blackballed as a result of that and the nba took five or six years before they allowed me to make a presentation. in the interim, within weeks, the research i had been doing and selling to the industry i got hot out, big surprise, my partners were not particularly happy about that but in retrospect it all worked out. as time passed i became more concerned about what was going on and lead me to write a series of letters to everyone or anyone that i thought would listen who
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could take a second look about what was going on. one of those letters is included in the handout material and that was a letter sent in 2000 to alan greenspan. in the particular timing on that letter was such that it was the first time alan greenspan had publicly criticized fannie and freddie. i wrote a letter commending him on that and outlining my concerns, most of which were economically based and asking if he would at least take a closer look at what was going on. i continued to write letters like that over a period of years. all the way up to september of 2008. one of those letters was -- a second one that was included was
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a letter i wrote to the hud secretary in the summer of 2005. we had just completed a study of the non prime market and the conclusion of the study was that almost 50% of the loans that were being originated were non prime loans. these were loans that were low documentation with high ltvs with no income or asset verification and was predicate on draft that i wrote to the hud secretary and asked if he would please discontinue championing and cheerleading home ownership because i thought we were very close to the edge. we were within a year or so as indicated in the letter. of a collapse in the mortgage market. >> your within one minute. >> okay. having said that, let me get
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back to the book. i write a monthly book review. i look forward to doing a book review having read bob's well-written, easy to read, concise history that will be published in the december issue of mortgage banking magazine. with that, let me turn it over to edward pinto. >> thank you, alex. thank you for arranging this book session and thank you, bob, for an excellent book. i enjoyed reading it and i've learned a lot, the history going back to the beginning. i knew some of that but learned a lot more. thank you, tom, for your help in standing up for fannie and freddie at your friendship. my task when i read a book, that i have some relatively intimate knowledge of, is to look at the parts that i have that knowledge and see how it compares to what i know. there is the book called good to
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great britain by jim collins, about ten companies, one of which is fannie mae and talking about fannie mae in the 1980s, the david maxwell era and i was at fannie a 84-89. not taking anything from what david did in that time period but if you were to take out any references to fannie mae's a you didn't know it was about fannie mae and ask me which company the chapters about, the last company in the world i would have ever guessed was fannie mae. it had no relationship to reality. there is another book, all the devils are here, the first chapter is largely about the 1980s and i found 20 or 25 mistakes large and small in the first twenty-five or thirty pages. i had to wonder what is going on in the rest of the book that i don't have as much into the knowledge -- intimate knowledge
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about. reading bob's book i found no major mistakes. i could have quibbled about a year, that is it. where he had information that i was unaware of it all seemed consistent and tied up with other information i had so congratulations on the research work. i found his research hadden broad range of people he talked to. that was one of the problem with all the devils are here. the narrow range of people, a really 1-sided view. your reporting instincts and quality of your reporting comes through to me as i read the book. bob talked about jim johnson in the study that was done so the conclusion was if we don't give up the charter, we have to hug the charter. to protect the charter at all costs and jim johnson was the one that came up with a strategy that said the way to do that is
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affordable housing because the only regulator, the real regulator was congress. they were the only ones who could change the charter and if you could basically coopt congress and capture them through affordable housing, then you would protect your charter and do all the things from earnings perspective that they when on to do. y. johnson? a friend of mine who had been at fannie in one of the regional offices said it was very simple. fannie hadden near-death experience on interest rate risk and they thought they had solved through hedging. a near-death experience in credit risk, and they're left with one ridge, political. who do you bring in to deal with political risk, bring in a politician. the qualification that jim
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johnson had, i want to spend the rest of my time focusing on a couple friends. one was a press release that fannie mae, jim johnson announced in 1994 the trillion dollar commitment, they went into great detail, but what they are going to do the national homeownership strategy which are discussed in bob's book, i start with lenders, community activists to the senate banking committee. the challenge was thrown down that brought fannie mae together with community activists and congress to accomplish what became trillions of dollars of affordable housing lending and loosening of underwriting standards. lenders will respond to the most conservative standards unless fannie mae and freddie mac are aggressive in convincing in their efforts to expand the narrow underwriting.
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the first focus on fannie and freddie, aggressively expanding their underwriting and circled back to lenders but i would point out of this says lenders were conservative and that had to be changed and the way to do it was through fannie and freddie. step 1, 1994 you had a hand out. i will go through this quickly. fannie vowed to transform housing finance, in a 2,000 ridge press release, transform the housing finance system, the company will providepress relea housing finance system, the company will provide $1,000 in targeted lending. this was $10 million in 1994, below median income and new immigrant, presidents of central cities and other underserved areas and people with housing needs. reach out to every renter in america to provide information to buy a home, break down barriers, arbitrary barriers,
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every american wants a mortgage, will have their loan approved or put on have to get the loan approved. target the fed, new immigrants was one of the drivers for the no doc load dock years later, eliminate the final no in the mortgage application process. one much was made of wamu floating like that, if any hadden in their press release in 1994. they promised flexible underwriting standards, in other words loose lending. that is what they mean. affordable housing is another word for crop subsidies. that is what it means. fannie and freddie were famous for subsidies and well-documented by at a cafe f --fh --fhfa. the one that was the worst that politicized fannie is open 25 and in a partnership offices grew to 50 something, that will
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form long-term partnerships with cities, rural areas and underserved committees. political offices was a huge cultural change that did not exist before that. i can testify to that during the time i was there. notwithstanding what the rhetoric and noble sounding goals this trillion dollars down payment on transforming housing finance by showing america a new way home, the book that jim johnson wrote was really an effort to do a more straightforward and mundane objective to accomplish a more straightforward mundane objective. stop any unwanted welcome changes to the charter by capturing a regulator, congress, give copious amount of affordable housing to accomplish that. worked until the charter was changed on june 30th, 2008, a mere weeks before there collapse. step 2 was national homeownership strategy which brought the rest of the lenders who were conservative and it
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brought everybody in the mortgage finance field into the fold and created a partnership to accomplish financing more affordable and flexible in order to increase home ownership opportunities. what happened, you have the chart, fannie went into competition with at age 8, down payments when the. i take issue with what bob , don payments when the. i take issue with what bob -- downpayments went down. this was a process that was slow but went on for many years. this chart is inverted showing the decline in down payment on some brymac and sub prime tries to compete with what fannie, freddie and fha were doing and historically some prime had 20% down payment on purchase loans. this chart starts in 2001.
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the data provided to me showed that in 1992 was a 25% down payment. >> one minute. >> you have the debt ratios kept going up and up and up. i point out this was a process that took place every year. by 2007 over 1-third of the gmc's full documented loan exceeded a $40,000 debt ratio. tom provided data that said that was the beast sub prime loan in 1991. that is how prime changed due to these efforts. i would only add that it happened relatively early in fannie mae and freddie mac were large players in it. the consequences of the misrepresentation on lending is well known. same thing happened with credit scores. back to the quote, lenders will respond to the most conservative standards unless fannie and
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freddie are aggressive in convincing narrow underwriting, results for the housing finance system, transformed which was jim johnson and fannie mae's goal and that is what we ended up with. >> thank you very much. we will leave a little extra time because i know many of you will want to ask questions but let me give bob a chance. any comments to add at this point for a minute or two? >> no. just turn over the time to people who came here today. >> we're glad to take your questions. i remind you of the i rules - --aei rules. >> burke gets the first question. >> only if he behaves himself. tell us your name and your affiliation and your question please. >> longtime fan of fannie and
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freddie. bob, i thought i heard you say at the end of your remarks there was an inference that congress -- might have in mind, 70 years of market failure. i was puzzled by that comment. it seemed to me when you had 17 years of government failure and failure of government policy and my question for you is given 70 years of government failure in all aspects of housing finance, going forward why should congress trust the government? >> thank you for giving me a chance to clarify it that. my point is exactly the same. since the 1930s we have not given the market chance. the system is built up to be dependent on government programs. nobody really knows what a free
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market system would be any more. i think congress will have a reluctance to go there because congress will be told by the realtors and homebuilders that it is too dangerous. this will ruin the housing market and they will all be blamed for it. it is not impossible to think we will go back to a free-market system but congress will be very wary because that is going into the unknown at this point. >> other questions? over here? >> good evening and thank you for the opportunity. it was an excellent presentation this evening. i am charles madonna will, grad student at --mcgonagle. i am talking about a serious debate that occurred in 2005 in fannie whereby he mentions whether to stay the course and
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remain as a niche player in the mortgage market or enter the some prime market. as a means to capture additional market share and stay competitive with what is occurring at the same time. my question is if fannie and mud had stayed the course and not gone so heavily into the sub prime market what would have happened and where would they be today? it is a hindsight question but i am interested in your thoughts on where they would be given that. >> that is an excellent question. i think they would have lasted longer than they did. it is hard to know if they had stayed the course at that point they could have survived 2007-2008. they might have. we did have a 30% fall in housing prices which is pretty devastating for anybody holding trillions of dollars of
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mortgages. on the other hand the decision to not stay the course and take more risks starting in the beginning of 2006 worsened the situation for the whole country and for themselves. ganoid would argue no matter what we had done we would not have survived 2008. ..
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the boom part might last three, four years, five years tops. my experience in every case had been involved in from the 1970s onward, he'd end up with the last couple of years leading to some searchers crazy lending. that's the way underskirt. we used to call it going down the slippery slope and that's what would happen. so what you have here is a process that went on for the real price change from the 290 through 2006, 2007, depending which index you look at, you have nine or 10 years of unprecedented growth. alaska but here's was that for us, but she had not meant a mount, a bubble of immense size before that.
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when a mentally undercapitalized is one of the big risks in at the same time their capital was weak capital. they counted a lot of tax credit, so i think they were doomed to matter what because they were basically floating on a thin layer of capital and that had been the case. they negotiated that case in 1882. >> there was one more other big lender and that was the chinese and other foreign official bodies or by fannie and freddie obligations, which money was going to feed the bubble. but they were buying it rightly assuming that the government would take care of them, even though they had virtually participated in running the risk. the risk would find somebody else is there interesting memoir the crisis relates to china for the olympics, something like see
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i told you. any other questions? one in the back year a number come to you in for. >> david carrier, national association of credit unions. i'm curious who you feel should be securitizing mortgages and if you feel it's the banks, why should we trust them? and like to hear from each of you actually. >> were you trying to direct that to somebody in particular? >> to all three. will give you first crack and keep her other comments brief. >> i would say it doesn't matter so much to does securitization. i would be in theater is trying a role with alone is going to securitization has to meet certain commonsense standard.
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other loans that don't mean the standards could be made, but they would be kept by the lender. the securities that could be a public utility or it could be opened up to any firm that wanted to go into the business. there's going to be huge debate infrastructure makes sense, but it's very difficult for congress to decide what is the right formula. >> i think i concur with bob on that. anyone who wants to securitize the issue should be permitted to do so. why not have a structure in terms of the tested the government, but where any originator can issue security. i think that's the direction that the market is going, dsh fa, with creating a securitization platform if you will that anyone can plug into a thicket paying and will do this in the right direction, open a
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securitization to any large originator that wants to put the pools together that would not preclude credit union national or aba or like bodies to create for smaller entities that don't have large amounts of volume. >> or even a federal home loan bank. >> in the white paper that alex and peter wallace and i wrote a year and a half ago, we address this question twofold. one was we should have a mortgage market that does not rely on government primarily in the way you could do this by having expert haitians in a design that loans are prime loans in prime loans are commonsense, not the way they came to be defined by fannie and freddie. secondly, we suggested that mortgage-backed security should be limited to prime loans. if you want to do something else cannot do that that through a portfolio of the capital requirements and others are very
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different. i would point out that there is a great study on a scholar page of the new york governor appointed a commission to investigate the collapse to mortgage-backed securities market and the commission was appointed against a report and a detailed the problems with mortgage-backed securities. the only problem is the date of the report his 1934 and is the alger report. again, you can find it on my web page. >> thank you to a question appeared pleased microphone on the site here. >> push is going to add a comment. >> what is your name? be my carol clayson. is it the other gse, director of portfolio policy and then became director of regulatory compliance when both ao forms. i have to say the stress tests were dictated and they wouldn't have caught some of this. they would allow for pre-float
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in the way the assumptions were created and i worked with had on how they were going to be implemented. there was concern because people were thinking, where are we going to find all these people qualified for these mortgages? for underwriting efforts to make headlines from it with nationalities and have a different way of extended family type of support, gifts and things like that. there is concern because it was a public and private company with market share in countrywide was coming in to securitization. but at that point, my perception is that fraud was you had criminals. it wasn't until housing was seen as an investment good that everyone got on the bandwagon and bankers came in.
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so that was my perception. we did the exotic products at that time for tiered payment mortgages. home equity loans were just coming on board. and the low doc loans were monitored. we had a different type of borrower. >> will have to cut your time there. thank you very much for the comment. who will take two more questions and then the last question will come over here. >> i enchanted rather, well known to time and at the housing specialist in gao. i'm going to ask provocative questions. that's what we're trained to do. to mr. haggerty, of course i read your book.
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>> if you can fix them immediately. >> i actually do plan to buy it. i have a long history self giving love back to and freddie. my question is basically this. i don't know whether you done this in your book. i haven't seen anything along the lines for even the financial inquiry commission didn't seem to be doing what i'm about to suggest, which is something gao would do. if we were asked by the federal government is primarily or exclusively responsible, the first thing i would suggest is okay, let's do a side-by-side comparison. that the air, private-label, portfolio lenders. you know if their performance is by origination year. q-quebec 298, 99 when the bubble began to go up to 2006 and even beyond 2007, if you want to
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fascinate and a side-by-side comparison. that's got to include not just going to fault. i seen it in article, but that's not adequate in my opinion. you have to translate that into bone volume based on unpaid principal balance. that doesn't matter fannie had a 7% default rate and private sector had a 25% rate if in fact danny's volume is six times higher or vice versa. so i've never seen that done. i looked through all over. i don't know anyone who's done it. until someone does that side-by-side, looking at years before the bubble burst in 06 and right after that 10067, i don't see how you can make the conclusion that the private sector did it by the federal government did it give >> a technical question.
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>> mayra furst remarkably both of them today. but it would be valid to look at it in that way and i can't remember if i've seen that kind of volume related comparison. that would be very valuable to look at. >> jim, i think the issue that really changes the question is fannie and freddie found that primary care. if the affordable housing goals on the prime market, nobody could compete with that, so that became the basis of their core business. if they had to move out, they didn't move over to tighter prime. they moved to lose their prime. i've had pointed out in 2000, whatever was spotless due to his prime and he saw the charts and that's why put this charts. as he moved out, what would've been a sub prime loan.
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33% would've been a piece of prime. and all of a sudden see any is making all those prime loans. where's the rest of america going to go? you a 20% in 1982. i possess each in half as a private actor. you a 20% in 2002. they had a choice. they could either be in the field or they could without the risk curve. they had a choice. i showed you at fha date, the private sector moved out also. so to safety and he ended up the best and the other worse to say and obvious. of course they did. not only did they have the prime, but they got the best of the worst. i'll leave it at that. >> last question over here. >> john henry, dry stone
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capital. do any of you or does anyone have a detailed plan on how to put fannie mae and freddy back into my mouse clicks how do you take a $5 trillion enterprise included in discontinued operations over time. there would be politically acceptable. >> we will at pop stardom that, but afterwards if you want to catch me we can talk about that informally and i'll share a few ideas with you. >> i certainly don't have a plan. i think alex and ed do have suggestions and very interesting ones. >> do have a moment just to read the conclusion that mr. johnson spoke quite >> just one minute. >> my ultimate vision is of a housing finance system that is
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flexible to the capability of every individual family. we should defend a system that shows people able to afford and builds momentum for its ownership by giving savings vehicles come accounts and information. people have equity in their home and want to use it on the system should make judgments on how much let the news. the system should allow flexibility based capacity and abide all families to think about homeownership and prepare for it. it shall close to my mind when i read the what was driving a was more and more debt, more and more coverage. i was the only thing standing freddie were interested in. their business is mortgages, said they wanted more of them on the bigger house, boat down payment and higher mortgage, whatever it was this all the way to increase profit potential because that's the way the private public system was devised. >> thank you.


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